Can Mispricing Explain the Value Premium?

Financial Management, Forthcoming

38 Pages Posted: 22 Apr 2019

See all articles by Jeffrey F. Jaffe

Jeffrey F. Jaffe

University of Pennsylvania - Finance Department

Jan Jindra

U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis

David Pedersen

Rutgers School of Business-Camden

Torben Voetmann

The Brattle Group; University of San Francisco

Date Written: March 31, 2019

Abstract

A great deal of empirical research finds that stocks with low market-to-book (MTB) ratios have outperformed stocks with high MTB ratios. Rhodes-Kropf, Robinson, and Viswanathan (RKRV) (2005) separate the MTB ratio into a mispricing component and a growth options component. We investigate the asset pricing implications of this decomposition. We report that RKRV’s mispricing component, but not their growth options component, predicts abnormal returns for up to five years. In addition, using spanning regressions, we find that RKRV’s mispricing component, but not their growth options component, provides incremental information relative to existing asset pricing models. Moreover, after controlling for mispricing, value no longer beats growth, suggesting that RKRV’s measure of mispricing can explain the value premium. In total, our evidence is consistent with a behavioral explanation of the value premium.

Keywords: value premium, mispricing, growth options, return predictability

JEL Classification: G14

Suggested Citation

Jaffe, Jeffrey F. and Jindra, Jan and Pedersen, David and Voetmann, Torben, Can Mispricing Explain the Value Premium? (March 31, 2019). Financial Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3366560

Jeffrey F. Jaffe

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-5615 (Phone)
215-898-6200 (Fax)

Jan Jindra (Contact Author)

U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis ( email )

44 Montgomery Street
San Francisco, CA 94104
United States

David Pedersen

Rutgers School of Business-Camden ( email )

227 Penn Street
Camden, NJ 08102
United States

Torben Voetmann

The Brattle Group ( email )

201 Mission Street
Suite 2800
San Francisco, CA 94105
United States
415-217-1000 (Phone)

HOME PAGE: http://www.brattle.com

University of San Francisco ( email )

2130 Fulton Street
San Francisco, CA 94117
United States

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